India: Impact Investing in the Social and Environmental Sectors

By now, it is pretty obvious that India has a booming economy, which has helped numerous individuals and families have a far better quality of life than could have been previously imagined. However, is it fair to say that poverty is close to eradication in India?

The clear answer is no. By most estimates, for more than 600 million people in India, the quality of life is still below what would be considered reasonable in the western world. In spite of numerous investments and aid agencies that are working to eliminate poverty, the number of people impacted is still small compared with the total number of individuals who need to be touched.

A New Class of Investor

Enter a group of investors who are referred to as impact investors. These investors and funds believe they get more for their money by investing in enterprises that have social and environmental benefits. However, these investors are not just seeking to make charitable contributions, they are also seeking sustainable businesses that have a positive cash flow over a defined period of time (see Figure 1). These businesses may have lower rates of profit and return on investment, but they should still make money.

In this way, impact investors want to be seen as being somewhere between a commercial investor who is purely interested in high returns and a philanthropic individual or organization that donates money for the general good.

Figure 1: Financial Model for Impact Investors

The presence of these organizations in India has been growing at an exponential rate over the last few years. Organizations such as Aavishkar (primarily local focus), Acumen E+Co, and Bamboo Finance have taken significant steps by investing in many ventures that have beneficial social and environmental impacts.

These organizations invest in a range of different businesses, including the production of solar-powered lanterns for poor villagers and manufacture of fuel-efficient stoves that use agricultural waste as a cost-effective and more carbon friendly alternative to traditional sources of fuel (such as liquefied petroleum gas). According to anecdotal conversations with some of the key players, the number of companies interested in impact investing is expected to double in the next few years.

Case Study of a Successful Project

One example of an impact investment project is the Low Carbon Enterprise Fund (LCEF). The LCEF is a global program of the ERM Foundation, a registered charity supported by Environmental Resources Mangement (ERM). ERM is a global environmental, health, and safety consulting company that has offices in both Mumbai and Delhi, India. One of the ventures in the LCEF’s portfolio includes investment in an Indian company that produces fuel-efficient burners using 40 percent less kerosene, a substantial cost savings compared with traditional burners. LCEF’s US$ 120,000 investment in this company also helped the company achieve a more economic scale of production, increasing the likelihood that the business would stabilize and scale up.

The LCEF has since measured the benefits of the investment using criteria for monitoring the impacts of social investments that were developed by the Global Impact Investment Network (GIIN) with the support of the Rockefeller Foundation. Benefits included the following:

Job creation—Since the LCEF investment, 117 jobs have been created. Job types included both direct positions (i.e., within the company) and indirect positions (i.e.,external manufacturing outlets that were contracted to make the burners).

Savings—Households using the burners were able to save approximately US$ 5 per month, and these homes had average household incomes of only US$ 155 per month. This cost savings represented a significant portion of monthly household income.

Carbon savings—ERM’s climate change consultants calculated that the burners sold in the past year have saved more than 30,000 metric tons of carbon compared with a baseline of regular burners.

Growth and investment—Part of the LCEF investment was directed towards hiring a Chief Executive Officer, who was able to increase sales over 18 months from 40,000 burners per month to more than 100,000 burners per month. The increase in sales also helped transform the company from a loss-making enterprise into a profitable one, which attracted an additional US$ 200,000 investment from a second social impact investor.

Future Needs

Despite the encouraging success of this case study, many entrepreneurs who have promising ideas have found it extremely difficult to generate interest from the impact investing community. The most commonly stated reason for this difficulty is that target companies do not have strong internal governance, management, and reporting systems in place that would give the investors confidence in investing in the businesses.

Sam Pitroda, referred to by some as the father of India’s telecom revolution, believes that the government of India is taking impact investing very seriously and is considering making a US$ 225 million investment via public and private partnerships. We will know in the future if this is something that will happen. In the meantime, work is being done by organizations such as Dasra, which has helped encourage start-up enterprises to form a social group that trains together and ultimately helps some of the most promising entrepreneurs financially via funding.

In addition, social impact investing is getting a lot of press coverage in India. The Times of India, India’s leading newspaper, featured awards in this category being handed out by the Prime Minister of India to promising enterprises and individuals in this sector.

In conclusion, one can confidently state that India is in the throes of an impact investing revolution. Moreover, this trend and successful entrepreneurial models from India are potentially being replicated across many other parts of the world, such as Africa and South America. While some failures have been observed in social microfinance investing, many important lessons have been learned that can only help this sector in moving forward.

About the Author

Sanjay Sampath is a principal consultant in the Mumbai, India, office of ERM. He is actively involved with the ERM Foundation and the Low Carbon Enterprise Fund and oversees one of the LCEF’s investments. He is also the team lead of the Air Quality, Sustainability and Climate Change practice in the Mumbai office. He was previously in Houston, Texas, U.S.A. for nine years, most recently in the role of a senior project manager in the field of air quality compliance with Sage Environmental Consulting, where he also served as the head of Indian operations. He was also previously employed by RMT, Inc. in theirHouston office.